Pension savings could boost child benefits, mutual insurer finds
Thousands of higher-earning families could boost their child benefit entitlements by saving more money into their pension, according to a mutual insurer.
Royal London calculates that working families are collectively losing up to £171 million per year by failing to make the most of a "little known" connection between their child benefit entitlements and their pension contributions.
Since 2013, working families where one parent earns more than £50,000 per year face a high income child benefit charge, which can wipe out some or all of the value of their child benefit on a sliding scale.
At the point where a parent earns over £60,000, the tax charge is equal to the amount they receive in child benefit.
But Royal London believes many people may not realise that earnings measured for these purposes are based on income net of pension contributions.
This means that people who ramp up their pension contributions could potentially lower their income for purposes of the high income child benefit charge - and face a smaller charge as a result.
Royal London said families in this position can get particularly good value from making additional pension contributions, given that people in this earnings bracket are nearly all higher rate taxpayers and effectively get a 40p in the pound contribution to their pension contributions through pension tax relief.
Based on previous estimates in 2013 from the Institute for Fiscal Studies (IFS), Royal London said around 320,000 families could fall within the £50,000 to £60,000 earnings band.
It said if each each of these people were to contribute an additional £3,000 per year into their pension, they could cut their child benefit charge by 30% of the amount of child benefit received.
For a family with two children this would be a gain of around £536 per year - and across all families in this income bracket this could potentially mean a saving on child benefit charges of £171 million per year.
Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: " For a higher earning family, putting money into a pension is already a very attractive option.
"They benefit from higher rate tax relief on their contributions and may also get a matching contribution from their employer.
"But what they may not be aware of is the additional advantage of reducing the tax charge they face as a higher income family receiving child benefit.
"This is another reason for families in this income bracket to prioritise pension saving and to take advice about their options."